The SEC's Expanded Governance andExecutive Com ensation Disclosure Re uirementsBy David C. Karp &Jeremy L. Goldstein

New rules for the 2010 proxy season take effect on February 28.

Late last year,the SECadopted

final rules thatbroaden thescope of requiredcorporategovernanceand executive

David C. Karp compensation

disclosuresin publiccompany proxystatements.These enhanced·proxy disclosureitems reflecta heightenedpolitical and

Jeremy L. Goldstein regulatory focuson corporate

practices that some have linked to theeconomic turmoil of recent years.

Boards will need to address these newdisclosure requirements promptly, asthey become effective on February28, 2010, in time for the 2010 proxyseason. Preparation will largely involveexpanding the information collectedby those responsible for drafting thecompany's proxy statement and boarddiscussion concerning the presentationof this information in compliance withthe new requirements.

Enhanced CorporateGovernance DisclosuresIn response to a perceived failure ofrisk management at some financialfirms, the rules require a proxystatement description of boardsupervision of the corporate risk

function. Importantly, the rulesrecognize that company executivesare responsible for day-to-day riskmanagement and instead focus onlyon the board's oversight role. Auditcommittees of NYSE-listed companieshave for some time been requiredto discuss policies with respect torisk oversight, and accordingly thesediscussions will in many cases be thefocal point for developing disclosuresin response to the new mandate.

The new rules also expand requireddisclosures about directors and directornominees, mandating an annualdiscussion of the specific experiencesand skills relevant to service as adirector. In addition, the rules imposelonger look-back periods for disclosureof other directorships (5 years) and oflegal proceedings (10 years), with anexpansion of the types of disclosablelegal proceedings. Directors will needto thoughtfully respond to longerD&O questionnaires being developedby companies to elicit informationnecessary to comply with the newrequirements.

Over the past decade some companieshave separated the Chairman and CEOpositions while other companies havenamed a lead director. Companieswill now be required to describe, andjustify, in their proxy statements theirleadership structure, including whetherand why a company has chosen tocombine or separate the CEO andChairman positions, and whether andwhy a company has a lead independentdirector. Compliance with thisrequirement should not be difficult,but companies should be sensitive to

writing their disclosures in a mannerthat does not reduce their flexibility toadopt alternative leadership structuresas personnel and other changes occurover time.

The new rules require companiesto disclose in their proxy statementswhether, and if so, how, the board'snominating committee considersdiversity in board composition. Ifthe nominating committee has apolicy regarding board diversity, thecompany must describe how thenominating committee implements,and assesses the effectiveness of, thepolicy. For purposes of this disclosure,each company may define diversityas it deems appropriate, and mayconsider any nmnber of factors, suchas professional experience, education,race, gender or national origin.

Enhanced ExecutiveCom ensation Disclosures---The rules require valuation of equityawards in the Summary CompensationTable and Director CompensationTable based on the grant date fair valueof awards made during the coveredyear, rather than the accountingexpense recognized during thecovered year for all outstandingawards. For performance awards, grantdate fair value will be based on theprobable outcome of the performanceconditions, with footnote disclosureregarding award value in the event of"maximum performance." Under therules, companies must re-calculateamounts (including amounts reflectedin the total compensation column) for

(continued on page 56)

BOARDROOM BRIEFING: CEO AND DIRECTOR COMPENSATION 2010 43

Karp & Goldstein, from page 43

each preceding fiscal year required inthe table, but do not have to changethe individuals who constitute namedexecutive officers as a result of therecalculations.

To the extent that risks arising from acompany's compensation programs foremployees generally (not just executives)are reasonably likely to have a materialadverse effect on the company, the rulesrequire a stand-alone proxy statementdisclosure, independent from theCompensation Discussion & Analysis, ofthe company's compensation programsas they relate to risk managementand risk-taking incentives. Directorsshould, through their risk oversight role,satisfy themselves that managementhas designed and implementedprocesses to analyze risks arising froma company's compensation programs,and should receive reports related to theidentification and mitigation of risks inthe company's compensation programsprior to the inclusion of the risk-relateddisclosure in the company's annualproxy statement.

Finally, in response to the perceptionthat there may be a conflict of interestwhen compensation consultants work onprojects both for the corporation and itsboard, the new rules require disclosure

of fees paid to compensation consultantsand their affiliates if a consultantthat is providing executive or directorcompensation consulting servicesor any of its affiliates also generallyprovides other services over $120,000. Ifthe board and management each havetheir own consultant, disclosure is notnecessary for consultants working withmanagement even if the consultant hiredby management provides other services.Boards will need to satisfy themselvesthat their companies implementappropriate disclosure controls totrack consulting fees and to determinewhether disclosure is required.

Lookina Ahead

Directors will also need to stay abreastof further regulatory developments, asthese new disclosure requirements aremerely a "down payment" on furtherchanges in the proxy area. The SEC hasnot yet taken final action with respectto proposed rules regarding the proxysolicitation process, though it remainshighly likely that the SEC soon willadopt some form of its proposal torequire companies to include directors .nominated by shareholders in companyproxy statements and proxy cards.

David C. Karp is acorporate partner at Wachtell,Lipton, Rosen &Katz. His practice concentrates on

mergers and acquisitions, corporate governanceand corporate and securities law matters. He wasnamed a"Dealmaker of the Year" by The AmericanLawyer in 2006 for his work advising the New YorkStock Exchange in its acquisition of ArchipelagoHoldings and the NYSE's subsequent initial publicoffering. In 2008, the International Financial lawReview recognized the cross-border merger ofthe NYSE Group and Euronext, in which Mr. Karpadvised the NYSE Group, as the "M&A Deal of theYear:' Mr. Karp served as counsel to the New YorkStock Exchange Corporate Accountability andListing Standards Committee. Mr. Karp earned aJ.D., with honors, from the University of Chicagolaw School in 1993, where he was amember ofthe University of Chicago Law Review, and an A.B.,magna cum laude, from Harvard in 1990.

Jeremy L. Goldstein is apartner at Wachtell,Lipton, Rosen &Katz. He is active in the firm'sexecutive compensation and corporate governancepractices, and has been involved in many of thelargest corporate transactions of the past decade.Mr. Goldstein has aJ.D. from New York UniversitySchool of Law, an M.A. from the University ,ofChicago and a B.A. cum laude and with Distinctionin All Subjects from Cornell University. He also is amember of the Professional Advisory Board of theNYU Journal of law and Business. He is amemberof the New leadership Council of Make-A-WishFoundation@ of Metro New York. In addition,Mr. Goldstein writes and speaks frequently oncorporate governance and executive compensationissues and is listed as aleading executivecompensation lawyer in The legal 500.

Kay, {rom page 42

and executive pensions, should beminimized as much as possible.

Eliminating these shareholder irritantswill allow the board to focus on payingfor performance, setting challenginggoals based upon history and analystexpectations, and increasing stockownership.

shareholders, the executives and board the executive pay model, Mr. Kay writes and speaksmembers will all benefit. regularly on executive compensation issues. His most

recent book, (co-authored with Steven Van Putten),Ira T. Kay is the managing partner of Ira T. Kay & Myths andRealities ofExecutive Compensation,Company, LlC, a leading independent and objective (Cambridge University Press) documents the realitiesadvisor on executive compensation to boards and of executive pay in the United States and the forcesmanagement. One of the nation's foremost experts that have shaped pay in recent years. He is also theon executive compensation, Ira served as the global author of The Human CapitalEdge (McGraw-Hili),director ofWatson Wyatt's (now Towers Watson) CEO Pay andShareholder Value: Helping the U.s. WinExecutive Compensation practice for 16 years. He the Global Economic War, (St.lucie Press), and Valueis anoted author of several books, afrequently at the Top: Solutions to the Executive Compensation

The challenges facing corporations quoted source for major U.S. media, and his research Crisis, (Harper Collins). He holds aB.s. in Industriall and their boards are significant. If focuses on the relationship between executive pay and labor Relations from Cornell University and aI we separate myths from realities, and company performance. Along-time analyst of Ph.D. in economics from Wayne State University.

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